Treaty reinsurance is a type of contract that confirms an insurance purchase by an insurance company from another insurer. This contract type is one of three reinsurance contracts. Today we will discuss the definition and the advantages of treaty reinsurance.
The core meaning
The reinsurer company buys the insurance from the cedent, the issuing company, and, therefore, assumes the risks predetermined in the contract for a certain period of time for a premium. This is a way for insurance companies to reduce their exposure: after taking on additional risks an insurance company can cede some of them to a reinsurance company and pay it a fee. The presence of the reinsurer frees up the insurer’s risk capacity and protects it from extremely severe claims.
Usually, relationships between the reinsurer and the ceding insurance company have a long-term character. The familiarity with the cedent allows the reinsurer to plan out the risk types and the possible profits.
There are two types of treaty reinsurance:
- Proportional – the reinsurer takes on a proportion of policies and receives a proportion of premiums;
- Non-proportional – the reinsurer undertakes the responsibility to pay out claims that are higher than a certain amount in a certain time.
Main advantages
Thanks to treaty reinsurance, the ceding insurer is covered against a class of predetermined risks: its equity is more secure and more stable in case of major events. In addition, with reinsurance, an insurer does not need to excessively raise the costs of covering its solvency margins to cover more risks. Actually, substantial liquid assets become available for insurers during exceptional losses thanks to reinsurance.
Other reinsurance types
Other reinsurance types are called facultative reinsurance and excess of loss reinsurance.
The main difference between treaty reinsurance and facultative reinsurance lays in the fact that treaty reinsurance can be compared to a contract that covers a certain type of risk. While a facultative certificated must be provided every time a risk is passed from the cedent to the reinsurer.
However, it is important to note that facultative reinsurance gives the reinsurer an opportunity to accept or reject individual risks instead of treating them as a package. This type of agreement requests separate negotiation which turns out to be more expensive.
When it comes to excess of loss reinsurance, it is a non-proportional type of reinsurance. Often, this reinsurance type leads to both the cedent and the reinsurer sharing the losses. It is in fact less similar to standard insurance than the other two types.
In case you are looking for advice on conducting your business with fewer risks, do not hesitate to contact COREDO for recommendations.